Natera - Q3 2024

Transcript

Operator (participant)

As a reminder, this conference call is being recorded today, November 12th, 2024. I would now like to turn the conference call over to Michael Brophy, Chief Financial Officer. Please go ahead.

Michael Brophy (CFO)

Thanks, Operator. Good afternoon. Thank you for joining our conference call to discuss the results of our Q3 of 2024. On the line, I am joined by Steve Chapman, our CEO, and Alex Aleshin, General Manager of Oncology and Chief Medical Officer. Solomon Moshkevich, President of Clinical Diagnostics, couldn't be here today, but will be joining us again next quarter. Today's conference call is being broadcast live via webcast. We will be referring to a slide presentation that has been posted to investor.natera.com. A replay of the call will also be posted to our IR site as soon as it's available.

Starting on slide two, during the course of this conference call, we will make forward-looking statements regarding future events and our anticipated future performance, such as our operational and financial outlook and projections, our assumptions for that outlook, market size, partnerships, clinical studies, and expected results, opportunities and strategies, and expectations for various current and future products, including product capabilities, expected release dates, reimbursement coverage, and related effects on our financial and operating results. We caution you that such statements reflect our best judgment based on factors currently known to us and that actual events or results could differ materially. Please refer to the documents we file from time to time with the SEC, including our most recent Form 10-K or 10-Q and the Form 8-K filed with today's press release.

Those documents identify important risks and other factors that may cause our actual results to differ materially from those contained in or suggested by forward-looking statements. Forward-looking statements made during the call are being made as of today, November 12th, 2024. If this call is replayed or reviewed after today, the information presented during the call may not contain current or accurate information. Natera disclaims any obligation to update or revise any forward-looking statements. We will provide guidance on today's call, but will not provide any further guidance or updates on our performance during the quarter unless we do so in a public forum. We will quote a number of numeric or growth changes as we discuss our financial performance, and unless otherwise noted, each such reference represents a year-on-year comparison. And now I'd like to turn the call over to Steve. Steve?

Steve Chapman (CEO)

Thanks, Mike. Let's get into the highlights on the next slide. 2024 has already been a transformational year for Natera, and I think Q3 represents our best quarter yet. We generated $439.8 million in revenue, up 64% from the Q3 of last year, which represents a record quarter for revenue growth. Volumes continue to grow rapidly, up 24% year-over-year. We performed about 137,000 oncology tests in the quarter, which is up 54% from last year. Signatera Clinical Units posted another strong quarter, up 11.4 thousand units sequentially versus Q2. This is the third fastest quarter-over-quarter growth we've had since launch. We also grew a record 48.4 thousand units year on year, which is the best quarter we've ever had in terms of growth units. Our gross margins were 62% in the quarter, again a record for us.

And after breaking even on cash for a couple of quarters in a row, we generated $34.5 million in cash this quarter, which is, of course, another important milestone in our evolution. All of this puts us in a position to raise our guidance for the year, with revenue expectations now at $1.61 billion-$1.64 billion. That implies about 50% revenue growth for the full year, which would be the fastest full-year growth we've had as a public company and is significantly above our own internal expectations from the beginning of the year. Many of you saw the groundbreaking GALAXY data published in Nature Medicine and concurrently presented at ESMO in September, which delivered outstanding prospective overall survival data in MRD for the first time. We think this data is important because it strongly supports the core indication for MRD testing: adjuvant decision-making and recurrence monitoring.

In colorectal cancer, physicians have moved beyond analytical metrics and clinical validation studies and now expect to see prospective outcomes data like this. As a reminder, this took us over four years to generate, and we have a median of 24 months clinical follow-up, with a good portion of patients having three years of follow-up. I'm also pleased to announce the completion of a study using Signatera from the CALGB/SWOG 80702 trial, which is a randomized phase III study in CRC. These results have been accepted as a late-breaking abstract for the ASCO GI conference in January. As you saw from our press release, we see this trial as one of the most important in the space, given its size, randomized design, and indication.

As a reminder, the trial is looking at whether Signatera can predict which patients will benefit from escalation of adjuvant therapy and will report on disease-free survival and overall survival, respectively. Similar to ALTAIR, this will be another trial that is drug-dependent, and we look forward to sharing results in early 2025. We also expect results from the GSK ZEST trial in breast cancer will be presented at the San Antonio Breast Cancer Symposium next month. As a reminder, this trial was terminated in April of 2023 due to low trial enrollment, so it's underpowered, but we're still looking to see a trend towards improved disease-free survival in MRD-positive patients treated with niraparib versus placebo. Okay, let's get on to some of the business trends. The first slide shows Q3 volumes over time, and despite the scale of the business, our growth continues to be very strong.

In women's health, over the past year, we saw significant growth from our direct channel, augmented by the Invitae volume we added earlier this year. In addition, we launched our fetal RhD test at a time of critical need in the prenatal community. We are really seeing strong demand for this test, which can help physicians assess the need for medication traditionally given to RhD-negative women to prevent potential complications in future pregnancies. As we've spoken about previously, having an RhD test and the timeliness of our launch was important, given that OB-GYNs were facing limited supplies of this medication. The launch is also a great example of the passion and commitment of the Natera team rallying to help patients in need.

We're excited about the future of the women's health business, and we are working hard to help as many patients as possible get access to our differentiated suite of testing. We also had another excellent quarter in organ health, with strong volume growth year on year. The strength of our peer-reviewed evidence and differentiated product pipeline is being received very well by physicians. We now have more than 45 peer-reviewed papers in organ health, including the largest prospective study published in the field to date. We look forward to continuing to serve physicians and patients as we move forward. On the next slide, we're double-clicking on the Signatera clinical volumes. We processed 137,000 units in Q3, which includes 130,000 Signatera clinical volumes. This represents growth of about 11,400 units in the quarter, well above our average of between 8 and 10,000 units.

The volume was one of our best quarters of growth ever. Given sequential quarters tend to have some variability in terms of holidays and number of receiving days, it's also useful to look at the trend year on year. Q3 clinical units were 48.4 thousand higher this year compared to Q3 of last year, a record for the company. We're off to a great start in Q4 despite the impact of the hurricane, and the trends are continuing to be very positive. Okay, the next slide shows total revenues year on year and a sequential quarter trend. We are very pleased to post 64% revenue growth year on year. We have 34.5 million in revenue true-ups, which is lower than last quarter as expected, and Mike will talk more about that later in the call.

Even stripping out those true-ups would have yielded a growth rate of 50%, which compares very favorably with our fastest growing quarters, despite the fact that the revenue base has gotten much larger in the past few years. While the volumes are clearly providing a strong base for growth, ASP improvement continues to contribute to our revenue growth. We've seen progress across the board as we've worked hard to improve reimbursement for covered services in women's health, and the Signatera ASP continues to improve. It's important to recall that we reached this level without getting any tailwinds for the women's health guidelines. While we remain optimistic on guidelines for both carrier screening and 22q, we've planned to be successful with or without guidelines, and we're pleased to see that happening. Our growth in total company ASPs is also a function of our product mix evolving towards Signatera.

That shift in product mix is fueling the evolution of our gross margins, as shown here on the next slide. 62% gross margin is a record for us and well above our expectations at the beginning of the year. ASPs were once again very strong across all of our major products, and we're pleased to see Signatera ASPs step up modestly once again in the quarter compared to Q2. The COGS wins from the first half held steady in Q3, and we delivered a significant gross margin expansion over Q2. The true-ups moderated slightly, down to just under $35 million this quarter. This represents excellent execution as the cash receipts exceeded our past expectations. Excluding true-ups, underlying gross margins expanded considerably from roughly 55% gross margins in Q2 to over 58% gross margins in Q3.

Again, that is driven by strong ASPs, execution on COGS projects, and the continuing shift in the business towards Signatera. While reimbursement can fluctuate from quarter to quarter, we feel like we are very well positioned to continue to drive margins higher, led by Signatera volumes and ASPs continuing to ramp. So, accelerating revenues and gross margins, coupled with cash collections well in excess of prior expectations, are leading us to our Q1 of meaningful cash flow generation. The chart demonstrates quite a journey from Q1 of 2022, where we burned $162 million in a single quarter. The reality is that our strategies remain the same throughout this timeframe depicted on the chart. We made the big investments required to deliver excellent care for patients, and the volumes and reimbursement followed.

While we've been very efficient with resources, we've gotten here without big cost cuts that jeopardize the future of our business. In fact, as Mike will cover in the guide, we've continued to invest in future growth by adding meaningful investments to our R&D and commercial teams. As we look into 2025, we will continue to prioritize innovation and customer service while managing to cash flow break-even. We think that's the best approach for patients, for doctors, and for the business, given the size of the markets that we're in. With that, let me hand it over to Alex to provide an update on oncology. Alex?

Alex Aleshin (General Manager of Oncology and CMO)

Thanks, Steve. I'm pleased to share some of the recent results from the GALAXY study in colorectal cancer, which we believe were universally excellent across the board, particularly on Signatera's ability to predict overall survival, as well as adjuvant chemotherapy benefit in patients with CRC. As many of you know, GALAXY is part of the CIRCULATE platform study. We have presented a few data sets thus far, which have focused on disease-free survival since overall survival takes longer to mature. At the ESMO conference in September and published concurrently in Nature Medicine, we showed for the first time an overall survival signal associated with Signatera in a prospective study. Given that overall survival is such an important metric for oncologists and the gold standard for clinical trials, we view this as a major milestone for the field. There are a few main points I want to highlight for you today.

The first is that Signatera was predictive of overall survival. Patients who tested Signatera positive had a much worse prognosis than Signatera negative patients, around 10 times worse at 36 months. Furthermore, Signatera was the most significant predictor of recurrence as well as overall survival when compared to all known clinical pathological risk factors. The second point is that Signatera predicted an overall survival benefit from chemotherapy. The GALAXY results show that if a patient tested Signatera positive and received chemotherapy, they had a superior overall survival with a 50% lower risk of death versus patients who did not receive treatment. The study also demonstrated that patients who tested negative had no significant benefit from chemo in terms of OS, highlighting the potential for de-escalation of adjuvant therapy for a large portion of patients. Finally, we looked at Signatera clearance after adjuvant therapy.

We showed that patients who cleared ctDNA and remained Signatera negative had superior outcomes, with 24-month overall survival being 100%. In comparison, patients who did not achieve ctDNA clearance at 24 months had an OS of just 61%. These findings may allow for personalization of treatment and recurrence monitoring that we hope can fundamentally change how colorectal cancer is managed. So, in summary, we believe these results are incredibly significant and further expand the body of evidence supporting Signatera in CRC. Moving to the next slide. I'm also happy to provide an update on a key study in colorectal cancer. As per our press release earlier this morning, I'll first summarize the main points and why we believe this is such an important trial.

To start, the study is drawn from the CALGB/SWOG 80702 study that we'll refer to going forward as the 702 study, a randomized phase III clinical trial in CRC, which evaluated the benefit of adding celecoxib to adjuvant chemotherapy in the post-operative management of patients with stage three colorectal cancer. Individuals in the study were randomized to either receive adjuvant chemotherapy plus placebo or adjuvant chemotherapy plus celecoxib. The original study results published in 2021 showed that the addition of celecoxib did not significantly improve disease-free survival in patients with stage three colon cancer. However, that study was initially run without Signatera. The new analyses use samples from the 702 study to investigate whether Signatera can be utilized to identify a subgroup of patients who may benefit from escalation of adjuvant therapy with the addition of celecoxib.

This pre-specified analysis included more than 1,000 patients with Signatera ctDNA status post-surgery, so it will be a sizable readout. We will report on Signatera's ability to predict DFS and OS benefit from the addition of celecoxib. The results have been accepted as a late-breaking abstract for ASCO GI, along with the results of the ALTAIR study. So, we look forward to sharing more details on both in late January. On this next slide, we provide a bit more context on celecoxib, also known as Celebrex, which, as I mentioned, is the drug being investigated in this trial. Celecoxib is a nonsteroidal anti-inflammatory drug or NSAID, and as many of you are likely aware, NSAIDs are a class of drugs like aspirin that can be used to relieve pain, reduce inflammation, and bring down fevers. These medicines are widely available, relatively non-toxic, and generally low cost.

NSAIDs have also shown promise in benefiting certain subpopulations in CRC. For example, several studies suggest that NSAIDs reduce the risk of developing precancerous colon polyps. There's a clear need for additional adjuvant treatment options for patients with colorectal cancer, as there has not been a new drug approval in this space for over 20 years. ALTAIR will be the first randomized study to help address this unmet need, and we're hopeful that Signatera can help open the door to effective treatment options in colorectal cancer, personalized to patients who are most likely to benefit. And with that, I'll turn it over to Mike. Mike?

Michael Brophy (CFO)

Great. Thanks, Alex. The next slide is just a summary of the P&L in Q3 and the year-over-year progress. Steve covered the trends on revenues and gross margins, which I think is set in stark relief on this slide. We really are in a completely different place in terms of revenue scale and gross margins compared to where we were even just a year ago, which at the time was actually a very good result. R&D, we've grown as we've staffed up to accelerate the tempo of new product launches and additional clinical trials. SG&A has also stepped up meaningfully, although a significant chunk of this step-up is related to litigation expenses and non-cash charges related to stock-based comp. We, of course, added the Invitae Women's Health Sales team this year, and we've made steady investments in Signatera commercial operations through the course of the year.

Despite all those investments, you'll note that the loss per share narrowed significantly as our strategy continues to play out. That's consistent with the positive cash flow generation we posted in the quarter that you see at the bottom of the slide. Related to the cash flow generation, I was very pleased to see the day sales outstanding drop again dramatically to approximately 73 days in Q3 after hovering in the mid-90s range for several quarters previously, and after we had spiked to above 100 days during the first few quarters of Signatera growth. I wouldn't be surprised to see DSOs and quarterly cash bounce around a lot based on typical working capital dynamics for our business, but we are seeing clearly much more efficient conversion of our covered services to cash after years of hard work with payers to make this happen.

One other key subsequent event to mention is we are very pleased to retire the convertible notes that you actually see here on the slide. At the beginning of the pandemic, when the shares were roughly $25, we issued the convertible notes as an insurance policy to make sure that we had cash available to survive whatever might happen as the world was shutting down. The notes don't mature until 2027, but we were able to retire the note early via a soft call feature, given the tremendous share price performance we've delivered since then. This was a purely opportunistic move that cleans up our balance sheet at a time when many other players in our space have convert maturities over the next few years that are massive relative to their market caps.

We are now effectively debt-free as the UBS line of credit is secured by our own cash and earns roughly the same as the cost of the capital. We closed this transaction in October, so the convert will be wiped off the books when we print the 10-K this year. Okay, good. Let's get to the guide on the next page. As Steve covered, we now expect revenues between $1.61 billion and $1.64 billion, which is up roughly $300 million compared to our initial guide this year and implies continued growth in Q4. We've had very strong volume growth this year, but the revenue growth has really accelerated this year as we've seen strong realized pricing performance in all of the major products. Signatera especially has seen its ASP mature this year, moving from the 800s in the past to now roughly $1,050 as of Q3.

Note that 1,050 number is before the true-ups. That's the kind of organic, repeatable number that we anchor on internally. These same drivers are also transforming gross margins, and we now expect full-year gross margins in the range of 58% to 61%. We are bumping OpEx to account for elevated litigation and stock-based comp expenses for the year, in addition to the fact that we continue to keep our foot on the gas for future growth. Finally, I'm very pleased to update the guide to cash generation of $50 million-$75 million this year, where we started the year expecting to burn about $50 million. So, a meaningful swing there. As you think about how this continues into 2025, do keep in mind that there's about $108 million in true-ups baked into Q1 through Q3 revenue actuals now that we would not include in our guide for next year.

The organic underlying range for this year's revenue translates to $1.51 billion-$1.54 billion, and gross margins are 56%-58%. Those results are still well above our initial expectations and form a solid baseline for growth into next year. As in the past, baseline 2025 goals should be to grow the same number of units next year as we have in 2024. From there, I think we'll need to take into consideration the fact that we got a bolus of women's health units from Invitae in Q2, and that same influx of new units won't repeat next year. And then, on the plus side, of course, our base Signatera users continue to grow, and we expect to continue to receive recurrence monitoring orders as we continue with those patients on their cancer journey.

We would typically presume some erosion in women's health ASP pricing, but given the progress we've made this year, I think it's plausible to hold ASP steady into 2025. We are cautiously optimistic that Signatera ASPs still have room for modest improvement as we continue to see better coverage from Medicare Advantage plans, and possibly in the second half of the year, we could start to see some additional contributions from commercial volumes where state biomarker laws are in place. On OPEX and cash generation, Steve clearly laid out that our priority is to do everything we need to do to serve Signatera patients: more commercial operations, more clinical trials, and enhancing our menu of offerings.

We recognize it's important to remain cash flow positive, but we think the best use of that cash for the immediate term is to turn around and reinvest it in the business, particularly in support of Signatera growth. Okay, with that, let's open it up for questions. Operator?

Operator (participant)

Thank you. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, press star one again. If you are dialed in and listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Our first question comes from the line of Puneet Souda with Leerink Partners. Please go ahead.

Puneet Souda (Senior Managing Director of Life Science Tools and Diagnostics)

Yeah, hey, guys. Really strong congrats. I mean, strong quarter here. Congrats on this. You know, it's great to see the cash generation. Maybe, Mike, first for you or Steve, can you outline the ASP pickup that you're seeing across the product? I know you highlighted Signatera. Can you elaborate how that Signatera ASP can continue to grow and the stability of ASP across the other products? Because I think that has come in scrutiny a bit with some of the commercial payers paying closer attention to coverage and ASPs. So, wondering if you can elaborate a bit on that. Then I have questions on oncology.

Steve Chapman (CEO)

Yeah, Mike, do you want to take that?

Michael Brophy (CFO)

Yeah, sure. Yeah, thanks for the question. So, on Signatera ASPs, it's really the same kind of talk track that we've discussed previously. I mean, you've got really rapid movement upward in the Signatera ASPs from the $800s to now we're at about $1,050 on an organic basis. The path from here, I think there's always puts and takes, and there's always potential for kind of quarter-to-quarter volatility with ASPs. But from here, we feel like there's more room to run in terms of just execution with Medicare Advantage payers continuing to increase the % allowed for covered services with Medicare Advantage payers.

And then, as I mentioned in the prepared remarks, it's going to be a grind, but I think we're cautiously optimistic. Maybe second half of next year you could start to see some additional tailwind in the Signatera ASP as these state biomarker laws have had a chance to kind of go into effect and mature, and we've had a chance to interact with payers in terms of getting them online with covering those covered services as well. So, it looks like a good 18-month or so trajectory for Signatera ASPs. On the rest of the product portfolio, we've actually seen really strong kind of improvement, particularly in the major women's health products, both Horizon and Panorama. And I hear you.

I mean, I think there's always, having just been in the diagnostics business for long enough, you're always kind of thinking about, well, is there some chance for erosion in these more mature products? And usually, I'd say yes. I think just the actuals that we're seeing and just maybe the time on task and the fact that these offerings are more and more enshrined as just kind of without doubt kind of in the standard of care for prenatal health has kind of given us more confidence and a bit more visibility on our ASPs there. So let me pause there, Steve. I don't know if you had anything else to add.

Steve Chapman (CEO)

No, that's good. I mean, I'll just add, over the last couple of years, we've invested a lot into improving things like medical appeals, getting the medical records when requested. And I think you're seeing some of the benefit of just executing on those things. And then, of course, there's still upside opportunity when we look at some of the tests that we're performing today where we're not really getting paid, for example, like 22q or RhD testing in the women's health sector or expanding to additional indications in oncology. So I think it's positive upside opportunity ahead.

Puneet Souda (Senior Managing Director of Life Science Tools and Diagnostics)

Got it. That's great. And then on the Signatera, can you elaborate how much of the lift are you seeing from volume growth in the community setting or maybe the tier-two setting versus when you present data at these conferences, including ESMO, ASCO, and others? The lift you get from that, I assume, is mostly in the academic setting, but just trying to parse out where you're seeing the growth and the sustainability of this growth, obviously very strong in the quarter.

Steve Chapman (CEO)

Yeah, good question. So, you know, it's really a mix. I mean, we see uplift here in both the academic and in the community setting. As we've said, we think about 40% of oncologists are using Signatera today. And so there's still a long way to go. The market's very underpenetrated in sort of the kind of low single-digit penetration. Every time we generate data, I think that just helps bring more and more physicians into the fray. And especially when you're talking about the type of data that we generated with GALAXY, that's exactly what people want to see is this longer-term overall survival data that now kind of we're getting to that level of follow-up where you're hitting that mark where you're kind of meeting the threshold that some of the doctors that have been holding out have been waiting for.

And then, of course, we're really excited about data that we're going to have upcoming in the future, randomized readouts. So I think there's a long way to go, but yeah, we're seeing it from both academic and community.

Puneet Souda (Senior Managing Director of Life Science Tools and Diagnostics)

Got it. And last one, just for Alex maybe. Alex, the Nature Medicine paper, where is that most helpful? Is that most helpful for NCCN, or is it driving deeper into the clinical practices? And maybe just elaborate, what do you expect out of the 702 study at ESMO? And would that study actually give you any further insights into the IMvigor011 study? Thank you.

Alex Aleshin (General Manager of Oncology and CMO)

Sure. Thanks for the question, Puneet. I would say for the Nature Medicine study, it's helpful, I would say, pretty much across the board. I would say, first of all, a lot of doctors have been waiting for OS data. I think DFS is one thing, but actually seeing that the assay is predictive of patients living longer, I think the whole field has been kind of waiting for a well-powered study to read that out. I think the second part for that study is the pharmaceutical market. I think we really have been able to show that ctDNA dynamics is predictive of overall survival. And that's really the first step to kind of validate a new certain endpoint. So I think we're seeing a lot of interest in those results. And I think they make us very confident, right, about some additional readouts that we've been awaiting.

I think the 702 study. I think we'll kind of defer commenting on the outcome of that until the embargo is lifted for ASCO GI. But again, it's over 1,000 patients. It was a well-designed, prospective, randomized study. So we're excited to share those results when we're able to. And then for IMvigor011, I think that's on track. We expect our partner, Genentech, to probably read out those results in probably the first half of 2025.

Puneet Souda (Senior Managing Director of Life Science Tools and Diagnostics)

Got it. Super. Congrats, guys. Thank you.

Michael Brophy (CFO)

Yeah, thanks, Puneet.

Operator (participant)

Our next question comes from a line of Dan Brennan with TD Cowen. Please go ahead.

Dan Brennan (Managing Director and Research Health Care Life Science and Diagnostic Tools Research Analyst)

Great. Thank you. Congrats on the quarter. Maybe first one just on Signatera price. Mike, the $1,050, nice improvement, but a little bit more modest than what we've seen in prior quarters. Can you just speak to, I know you gave some color in the prepared remarks, just speak to kind of some of the drivers of price from here, in particular, like on the biomarker. I know you guys have been, I thought, fairly constructive on what this opportunity could be. You've had, I think, five states live for over a year. You had three of the biggest states in the country go live in the last month or so. So I'm just wondering what your experience has been and whether or not that could be more of an upside driver, and maybe you're kind of baking some good services in there.

Michael Brophy (CFO)

Yeah, no, thanks for the question. No, it's been really constructive so far. I mean, the interactions we've had from payers has been quite positive, actually. Just our experience has been anytime you have coverage like this that comes online, it just takes about a year between the time that the coverage comes online to you get some denials back in the door, you appeal those denials, then you kind of get a critical mass of thousands of cases where you've submitted the claim correctly and appeals have been denied. And then you got to interact with an actual human, a more senior person at that payer, and just work with them on the workflow. And it's been really collaborative so far. So as I sit here today, I'm feeling really optimistic about it.

But the timeline I gave is just, that's just reflective of the way things work and how long it takes just to get the logistics right. Hopefully, it can come faster, but we'll have to see. In terms of the pace of the increase, yeah, I mean, I think that's an important point. I mean, there's kind of no way for us to just increase the Signatera ASP $200 a year forever. I mean, there's the maturity that we've had to get to here as we've kind of gotten into the launch. So that's just a realistic consideration. Having said that, I mean, the gross margins in the product are quite strong. I think they can continue to get stronger. So that coupled with the data that Alex highlighted on the call today, we're feeling really strong about the Signatera franchise.

Dan Brennan (Managing Director and Research Health Care Life Science and Diagnostic Tools Research Analyst)

Got it. And maybe just one follow-up. Maybe I'll say on the financial side, just on the gross margins, really nice gross margin expansion in 400 basis points, ex the true-ups. I know you talked about, Steve talked about in the prepared remarks, some of the ongoing cost initiatives. Can you just give some more color on the driver there? Are we starting to see the benefit of the Signatera just available to Medicare starting to come through, which is a nice gross margin leverage? And I know you kind of updated the full year guide, but as we, I think you talked a little bit about 2025, Mike, in the prepared remarks, but how do we think about the trajectory of gross margins as we kind of turn the calendar into 2025?

Michael Brophy (CFO)

Yeah, I mean, I think that on the makeup, that has remained relatively steady. I mean, we've seen some move in favor of the recurrence monitoring within the mix. I think what's more important, if you're thinking about mix for our corporate gross margins, is the mix between kind of franchises. So for a long time, Panorama was far and away our biggest product. And now, first last quarter, but now really this quarter is really the Q1 where Signatera revenues are meaningfully higher than Panorama. And it's now our biggest revenue product. So given the margins that we're seeing on Signatera now accretive to corporate gross margins, that itself is kind of driving this kind of corporate gross margin improvement. So I think that trend can continue to move in our favor as far as corporate gross margins go for next year.

Having said that, I mean, I think it's worth just understanding kind of the prior, the, had a stupid first question, which is like, what's the kind of rate of increase in ASPs? And they have to moderate, right? I mean, they have to be kind of more kind of steady improvements. And I would expect that to be reflected in the corporate gross margin trajectory as you go into next year as well.

Dan Brennan (Managing Director and Research Health Care Life Science and Diagnostic Tools Research Analyst)

Great. Thanks a lot.

Operator (participant)

Our next question comes from a line of Tejas Savant with Morgan Stanley. Please go ahead.

Tejas Savant (Executive Director and Senior Healthcare Equity Analyst)

Hey, guys. Good evening. Just a couple of cleanups to start on perhaps the guidance framework or even just what you're seeing in terms of recent trends in the business, Steve. So first of all, in light of some of the pain the private payers are going through in their Medicare book of business, have you seen any uptick in prior auth or just more documentation required in the last few months across the oncology portfolio? I know you mentioned the biomarker bill rollout starting to help a little bit in the back half of next year. But is there a risk here that some of these private payers might drag their feet on the implementation at all? And then, Mike, just a cleanup on the guide, really.

Can you quantify the weather impacts and to what extent that was a little bit of an offsetting factor in the revised guide?

Steve Chapman (CEO)

Yeah, I think good question on the insurance payers. I mean, the good news for us is we've sort of been dealing with all sorts of obstacles for years with respect to payers, whether that's prior authorization, medical records requests, just sort of outright denials, and then having to appeal. And this is something that we've developed systems, protocols, and processes in order to make sure that we can follow through and just not get kind of bogged down by these various bureaucratic procedures. So we've invested heavily there. Over the last couple of years, we've had tons of improvements. And I don't think we've noticed anything really different recently than what we've seen historically. But what we are seeing is that Natera is getting better at just responding to those types of things. And so I think that was definitely a good investment.

With regards to the biomarker bills and commercial opportunities, as Mike said, these things take time. And it's good that we have that ahead of us. We've done really well historically, and then we still have this upside opportunity from biomarker bill implementation and commercial payer coverage and Signatera. The other area that Mike didn't highlight earlier that could be upside opportunity is just getting Medicare coverage and some additional indications. And there's lots of areas where we've published that we were in the process of submitting or interacting with Medicare to get additional coverages for Signatera. So we think that's an opportunity. And then, of course, when you look back at both in organ health and then in women's health, there's opportunities for ASP improvement, particularly around getting coverage for indications or tests today where we currently don't have coverage.

Tejas Savant (Executive Director and Senior Healthcare Equity Analyst)

Got it. Okay.

Michael Brophy (CFO)

And then Tejas, do you want to add on the weather? Just on the weather question, we think it's always hard to measure these things with precision. We think we saw a really modest impact to the weather with the hurricanes hitting that last week in Q3. So that probably had a modest impact in the Q3 results. I think that there was an impact that we saw in October and remains to be seen what that impact would be for the full quarter. We've kind of taken that into account. We're trying to take a kind of a cautious approach to the guide to try and work around that as people kind of not only just the weather itself, as people kind of get their homes rebuilt and kind of get themselves back into seeing their physicians and such.

Tejas Savant (Executive Director and Senior Healthcare Equity Analyst)

Got it. Okay. And then one on Signatera and the 702 study, guys. How should we be thinking about framing those DFS and OS results in terms of what's clinically meaningful for physicians? And also, given that the results will be dependent on the drug evaluated, obviously, can you provide a little bit of color or context around prior studies that showed Celebrex on top of standard adjuvant chemo as a promising approach in certain populations?

Steve Chapman (CEO)

Yeah, Alex, you want to take that?

Alex Aleshin (General Manager of Oncology and CMO)

Yeah, absolutely. Well, I think there's two parts to the question. The first is how well is the drug tolerated or the class of drugs tolerated, and then kind of what could be clinically meaningful in terms of an outcome from the study. I think the good news is that unlike traditional adjuvant chemotherapy, which has significant toxicities, sometimes a risk of death, I think the NSAID class of drugs, of which Celebrex is one of them, are pretty well tolerated. It's obviously not without side effects completely, but relatively, this is a class of drugs that thousands and millions of folks are taking for other indications. I think what good looks like, I think obviously that's going to depend on a few things. How does the readout look in terms of DFS, in terms of OS, and how does it compare to prior studies?

I think we've said in the past kind of the last study that led to an approval of a new agent was the MOSAIC study and had a hazard ratio in kind of the 0.75-0.77 range for DFS and a very small benefit for OS. So we do think that's kind of a good number to think about. I think Celebrex itself in the initial 702 study without any selection, I think showed a hazard ratio of, I think, around kind of the 0.8-0.9 range, depending if it was for DFS or OS, and it was obviously not statistically significant. So maybe kind of long answer, but I think the short of it is we do think anything that's significant below 0.8 hazard ratio for DFS and/or OS can be significant, especially if the class of drugs is pretty well tolerated.

Tejas Savant (Executive Director and Senior Healthcare Equity Analyst)

Okay. That's actually really helpful. And Steve, last one for me on screening. We've been getting the question a little bit. I think back in September, you talked about being relatively close to sharing that data. And I think you'd also called out that you expect initial proof of concept to be a little bit more sophisticated and fulsome than your initial expectations, which was going to help you sort of inform that go, no-go decision. So just curious as to where we are in terms of that process. Is your end still the right benchmark on timelines there? And has the goalpost evolved a little bit in your mind in light of the ESMO data on advanced adenoma from one of your peers?

Steve Chapman (CEO)

Yeah, it's a good question. So yeah, we plan on actually reading that out. As we said, I would say very early in 2025, there's a couple of big investor conferences and medical conferences where we're going to be reading out the initial early cancer detection screening data in CRC, and just stay tuned. We're very close now.

Tejas Savant (Executive Director and Senior Healthcare Equity Analyst)

Fair enough. Thanks, guys.

Operator (participant)

Our next question comes from a line of Rachel Vatnsdal with J.P. Morgan. Please go ahead.

Rachel Vatnsdal (Executive Director of Equity Research)

Hey, great. Good afternoon and congratulations on the quarter, you guys. So first up, just on Signatera volumes, can you walk us through what you guys are assuming within 4Q for quarter-over-quarter Signatera volume growth? You've historically talked about this eight-10,000 rate for the past few quarters. You've obviously been beating that as well. So should we expect that trend of beating that volume level into 4Q to continue? And then what's kind of a safe sequential assumption when we head into 2025?

Steve Chapman (CEO)

Yeah. So I think as well, first on Q3, I mean, obviously, this was like a really strong quarter. I think we did 11,400 sequentially. That was, I think, the third fastest we've ever had, well above this average of 8,000-10,000. We said all along that you just really can't kind of get into the kind of quarter-over-quarter sequential comparisons just because there's differences in sort of the number of holidays. There are differences in the number of receiving days. And you can just, I mean, one day could be 2,000 additional samples, right, that you weren't able to accession because maybe it was a Sunday or maybe it was a holiday or something like that. So we're just sort of sticking with that conservative estimate of saying, "Look, 8,000-10,000 is sort of the average." That's kind of roughly what we've plugged in.

But of course, we're always trying to beat that. And either for outperformance or for just kind of the way the days fell and so forth, we've been able to come above that in the last several quarters.

Alex Aleshin (General Manager of Oncology and CMO)

I think on the Q4 number in particular, we don't really have enough Q4s in our bag to tell you exactly what the seasonality is with this product just yet. And to Steve's point, I mean, obviously, Q4, you're going to have more holidays. Last Q4, we ended up having a strong number, but Christmas and New Year's landed on opposing weekends. That made it very tempting for people to take that whole week off. So we ended up, I think in retrospect, got a lot of units kind of the first two weeks in January that would have normally landed in December. So hence the caution around trying to land on a specific number for a quarter here. But taking a little bit more caution around Q4 just because there are a lot of holidays.

Steve Chapman (CEO)

Yeah. But I think also as we said in the prepared remarks, I mean, despite I think this hurricane hit in the beginning of October, we're off to a fast start Q4.

Rachel Vatnsdal (Executive Director of Equity Research)

Got it. Thanks for that. Then maybe just on SG&A, so you raised the guide for SG&A for the year, and you've talked about accelerating some of your growth investments. So obviously, it makes sense to invest into the business. But just can you break down for us where is that driven increase in spend going towards? Then on 2025, you've historically talked about this annual OpEx growth of mid-single digits to high single digits over time. So is that the right way for us to think about 2025, or what other factors should we be considering that would move the number higher or lower relative to that range?

Steve Chapman (CEO)

Yeah. Let me comment on just kind of where we're investing. And then maybe Mike, you can comment on sort of what it looks like in 2025. Look, there's obviously a lot of areas of investment and expanding clinical trials, investing heavily into innovation, user experience, customer service, new patient portals, EMR connectivity, expanding, I think, certain areas of marketing, certain areas where it makes sense to add a handful of salespeople here or there, maybe more significant expansions. So we're doing all those things. And like we've said, we're in the very early stages of this opportunity. And we plan on investing in order to be able to serve as many patients as possible with our tests. And we're making those investments. Mike, do you want to talk about 2025?

Michael Brophy (CFO)

No, I think that's still the right kind of framework going into 2025. We mentioned on the prepared remarks, I mean, we don't really have an appetite to come back to you guys and say, "Hey, we're going to burn significant amounts of cash next year." And we understand that we need to be on the plus side of the ledger in terms of cash. But beyond that, our focus, really our primary focus really does remain on serving our patients and continuing to grow the opportunity.

Rachel Vatnsdal (Executive Director of Equity Research)

Perfect. That's it for me. Thanks, you guys.

Operator (participant)

Our next question comes from a line of Doug Schenkel with Wolfe Research. Please go ahead.

Doug Schenkel (Managing Director of Life Science Tools and Diagnostics)

Okay. Good afternoon, guys. Thanks for taking the questions. First on volume growth, you're tracking the year-on-year volume growth of, I think, about 550,000, maybe 600,000. Mike, if I heard you right, I think you said at some point on the call, we should expect similar volume growth next year. Did I get that right? And if so, does that mean a similar number of incremental tests across the portfolio next year?

Alex Aleshin (General Manager of Oncology and CMO)

Yeah. I mean, I think that's always kind of our baseline to try and do that as a growth goal, is to focus on this, quantify this as absolute units rather than growth rates. I think the growth rates become challenging because the base business becomes so much bigger. So that's going to be the goal. Similar comments as what Steve gave previously, though, as it relates to the different drivers and the pushing takes.

Doug Schenkel (Managing Director of Life Science Tools and Diagnostics)

Okay. Thank you for that. Year to date, you have about $110 million in true-ups. Hopefully, I did that math right. Obviously, we don't know what Q4 true-ups are going to be. That said, as we model out next year, should we be kind of taking true-ups out of the base as we think about normalizing the business base, or is there an argument that these true-ups are actually indicative of better collections and sustainable ASP improvements?

Alex Aleshin (General Manager of Oncology and CMO)

I think it's both. I mean, the reality is that the collections have come in ahead of our expectations as defined by our rules from last year. And so that's what's kind of driving true-ups, which should happen when the ASPs are going up this much. But the ASPs going up a lot is an attempt to kind of respond to that and just kind of match the revenue as best we can based on the information we have available to us at the time when we put the Q. So it's our kind of expectation that we're going to continue to see true-ups moderate.

As we kind of go into next year with the guide, I still think it's appropriate to guide without the true-ups because it's just impossible to kind of model the timing of when you get cash for a bunch of units that you're on the second appeal for and that you finally get the cash in. That's no way to guide kind of an operational business, so.

Doug Schenkel (Managing Director of Life Science Tools and Diagnostics)

Yeah. And Mike, I'm with you. And again, for whatever my opinion's worth, everything you just said makes sense. What I'm getting at is you've had these consistent true-ups, presumably from periods that aren't years ago. They're presumably closer and closer to the quarter we're in. So it's almost as if these true-ups are actually indicative of, obviously, their collections from past periods, but you're actually getting paid more frequently on these tests. So I wouldn't expect you to model or guide true-ups into the model, but I could see this being a sign that, yeah, the ASPs are actually going higher and this is sustainable. Is that logical?

Alex Aleshin (General Manager of Oncology and CMO)

Yeah. Yeah, definitely. I mean, I think that the fact that for those of you who've followed us for a long time know that we typically have some pretty curmudgeonly commentary about which way ASPs are going. I usually guide to some erosion, and those are the trends that we're seeing. I think that gives us some confidence that we can limit the ASP, that we can be in the zone where we are now. And then there are some specific drivers to the Signatera ASP that we think are ahead of us, right? So Medicare Advantage and potentially state biomarker bills. So I do think the improvement in kind of the collections and the reduction of the DSOs, I mean, I think that where that gets reflected is, one, in the ASPs actually are getting higher in terms of what we're reporting every quarter.

And also, that's getting reflected in our confidence in terms of what we can do over the longer term, with the caveat remaining that you will have ups and downs with ASPs and diagnostics business. That's just the way it goes. But we feel like we're in a good spot there.

Doug Schenkel (Managing Director of Life Science Tools and Diagnostics)

Okay. Last one, Mike. What was the mix of first-time tests versus recurrence monitoring? I think Dan may have tried to get at that earlier, but I'm just curious if you'd give us anything specific there because it was a really good gross margin quarter. Obviously, as that mix shift starts to kind of kick in, that's another leg to gross margin. But I didn't hear anything on the call to suggest that that was a material driver in this period to the margin improvement.

Michael Brophy (CFO)

Yeah. And just one tweak there. Rather than first-time patients, I think there's what we typically talk about as a split between patients that are in their adjuvant treatment window, like volumes in the adjuvant treatment window where we're getting reimbursed on the bundle, for example, and then patients who are getting a recurrence monitoring test. That trend has continued to be pretty balanced between the two. And what's happening there is that you have very healthy retention of patients that have stayed with us and continue to get Signatera through their journey as they go into remission. And then we continue to fill this top of the funnel. We continue to get new patients in the door. And so that has continued to increase our patients who are in the adjuvant treatment window.

And the net of all that is that we've been pretty balanced between adjuvant window patients and recurrence monitoring so far. So that by itself is not kind of. There's not some huge move in that trend just in this quarter. The bigger move, though, is kind of just the mix of the different franchises in terms of contribution and total revenue and the implications that has for corporate gross margins, as I described to Dan.

Doug Schenkel (Managing Director of Life Science Tools and Diagnostics)

Okay. Fantastic. Thank you so much.

Operator (participant)

Our next question comes from a line of Matt Sykes with Goldman Sachs. Please go ahead.

Matt Sykes (Managing Director and Research Analyst)

Hey, good afternoon. Thanks for my questions and congrats on the quarter. Mike, maybe just the first one from you. Just following up on Rachel's question on the OpEx, I'm just curious, as you think about the women's health business, certainly as it relates to sales and marketing, are we at kind of a steady state there on the sales and marketing side where there's sort of some maintenance investment that needs to be made, but most of the sales and marketing is going towards Signatera? I'm just trying to think about, as we move into 2025, how you're thinking about the allocation of OpEx across the product portfolio and just want to make sure that my assumptions that Signatera is sort of the beneficiary spender are going to be maintained into next year.

Michael Brophy (CFO)

Steve, do you have a take on that, or do you want me to go?

Steve Chapman (CEO)

Yeah. Yeah. I'll comment, and then if you have extra. But yeah, I would say that's about right. I mean, look, we already have, I think, a pretty big presence from a commercial standpoint of women's health, and we built that over the last 12 years or so. Obviously, we're sometimes able to kind of add in additional medical science liaisons or genetic counselors, medical directors, maybe do some new clinical trials and do innovative things like we did with the RhD test that was a very timely launch and able to help a lot of patients. But largely, yeah, we're focusing on, I think, helping oncology patients. And we see that Signatera is really making an impact on care, and we're seeing that it's at the very early stages.

And that's where a lot of the spending is going, both when you look at additional clinical trials, you look at research and development, you look at innovation, you look at sort of we already do have a big commercial presence there, but you look at sort of rounding that out. That's where a lot of the spending is going.

Matt Sykes (Managing Director and Research Analyst)

Got it. And then just for my follow-up, just on Signatera, have there been any noticeable differences in indication growth? Meaning, I know it's CRC and breasts are sort of the main ones, but have you seen any shifts towards different indications, any that are ramping up significantly that might have been sort of lower volumes to begin with, or has it been pretty consistent this whole time?

Steve Chapman (CEO)

Yeah. I think it's been pretty consistent, but certainly, what drives utilization broadly is peer-reviewed evidence. And where we're able to generate data, which we've done a lot of, I think we now have more than 85 publications supporting the use of the Signatera technology. Where we're able to generate data, that tends to be kind of where you see physicians using the product. And that makes sense, right? You want to have the evidence-based decision-making. So some of the areas that we talked about, muscle-invasive bladder, we're excited about that with IMvigor010 being, I think, a very strong study itself. And now with the IMvigor011 data reading out in 2025, as Alex mentioned, I think that's a great opportunity. Of course, IO monitoring is another area where we do see quite a bit of utilization. We generated some good data there. So yeah, it's a mix.

It's one of the reasons why I think there's still some upside opportunity from getting coverage, even from Medicare on additional indications, is that we do have a decent chunk of utilization that's outside of the currently covered indications.

Matt Sykes (Managing Director and Research Analyst)

All right. Thanks, Steve. Appreciate it.

Steve Chapman (CEO)

Yep.

Operator (participant)

Our next question comes from a line of Tycho Peterson with Jefferies. Please go ahead.

Tycho Peterson (Managing Director of Global Equities)

Hey, thanks. A lot's been asked already. Just a couple on the numbers here in the near term. What was the intake contribution in the quarter? And then you did raise by more than the beat, $40 million by more than the beat. What's the delta on that?

Alex Aleshin (General Manager of Oncology and CMO)

Yeah. The delta is really just the continued growth kind of across the book is what we've seen. I would also encourage you to back out the true-ups as well, but nonetheless, even backing out the true-ups, we increased the guide substantially more than the beat. And that's just kind of all the comments we've made on the call so far in terms of kind of where the business is. Invitae contribution, we haven't broken up specifically other than to say, I think at the beginning of the year, we had a $25 million contributor to the guide, and we kind of bumped that to $40 million. And it's been in that zone in terms of full-year contribution, and that's where we have it for the guide of the year.

Tycho Peterson (Managing Director of Global Equities)

And then I guess thinking about the framework you've put in place for next year, the 5 to 600,000 tests, where do you think kind of the community penetration goes? And then it sounds like you don't feel like you need to add additional reps at this point as we think about next year.

Steve Chapman (CEO)

Yeah. I'll just comment on penetration. I mean, look, obviously, it's slightly different by tumor type and then whether you're talking about sort of the adjuvant setting or new incident patients or the prevalent pool of patients. But looking broadly at the bigger opportunity, I mean, we still think we're in the low single digits. So there's a ton of opportunity ahead in community and academic settings. And we are adding sales team members in addition to medical team members and doing more clinical trials, which is a big part of our investment.

Matt Sykes (Managing Director and Research Analyst)

Okay. And then lastly, I guess on timelines for the readouts on breast and kidney, should we still expect those next year as well? I mean, I know we've covered CRC and bladder and some of the other indications, but how do we think about the breast and kidney timelines?

Steve Chapman (CEO)

Yeah. We've got, I think, a very solid roadmap of data that's going to be reading out. So not just across those indications, but I think a broad sort of span of indications. We've got pretty big data sets reading out, which we're excited about. So I think right now there's probably over 100 trials that are underway that are going to be reading out at various time points. So we're excited about that. We're excited about generating evidence that can drive additional coverage from Medicare and that can drive additional utilization.

Matt Sykes (Managing Director and Research Analyst)

Okay. Thanks.

Operator (participant)

This will conclude our Q&A session. And with that, we will conclude today's conference call. Thank you all for your participation. You may now disconnect.